NPR

Report Finds Lehman Used Accounting Tricks

Copyright 2014 NPR. To see more, visit http://www.npr.org/.

Transcript

ROBERT SIEGEL, host:

From NPR News, this is ALL THINGS CONSIDERED. I'm Robert Siegel.

MICHELE NORRIS, host:

And I'm Michele Norris.

One thing's clear, the investment bank Lehman Brothers may have gone bankrupt a year and a half ago, but its problems are by no means over. A massive report released last night recounts the company's last days, and it alleges accounting manipulations and negligence on the part of the bank's executives and auditors.

As NPR's Yuki Noguchi reports, the findings will likely add some legal drama to one of the largest and most dramatic financial failures in history.

YUKI NOGUCHI: On April 1, 2008, about five months before the spectacular meltdown, then Lehman chief financial officer Erin Callan went on CNBC. She touted its surprise decision to raise $4 billion from what she called long time supporters. Callan couched the move as necessary to address perceptions that the firm was in trouble.

Ms. ERIN CALLAN (Former CFO, Lehman Brothers): We, in particular - and it's an industry wide issue - but in particular came under I think the white, hot lights around rumors and suppositions with respect to the strength of our firm.

NOGUCHI: In the same interview, Callan said this.

Ms. CALLAN: That doesn't change our basic strategy that we want to continue to move illiquid assets off the balance sheets.

NOGUCHI: In fact, according to the report prepared at the request of the bankruptcy court, Lehman was already moving its assets around, but not in a way that was transparent to its investors and creditors. According to the report, the bank's officers tried to engineer ways to make Lehman appear healthier so it could avoid a credit rating downgrade and perhaps still attract some additional capital. Lehman used an accounting practice it called Repo 105 to essentially make it appear as, though, it's sold troubled assets, a move that would also make its debt ratio look better. As the financial crisis worsened, Lehman heavily relied on Repo 105, ultimately using them to take $50 billion of assets off its balance sheet.

According to the report, Lehman's former CEO Richard Fuld signed off on the accounting, so did the bank's auditor Ernst & Young as did Callan and her successor, Ian Lowitt. Through their attorneys the executives denied wrong doing, and in an Email Ernst & Young said it stands by its work. Though Lehman executives are already named in civil shareholder lawsuits, they do not currently face any criminal charges. Columbia law professor John Coffee doubts the fresh evidence in the bankruptcy examiners report will just lie there.

Professor JOHN COFFEE (Law, Columbia Law School): I think, this will probably increase the prospects of both securities litigation against Lehman executives and Ernst & Young.

NOGUCHI: Coffee says a similar report after Enron's demise bolstered the shareholder's suit against it and ultimately aggrieved investors collected more than $7 billion in settlement money. Using this kind of postmortem bankruptcy report as evidence to negotiate a higher settlement is one thing, using it to get a criminal indictment is another. Jacob Frenkel doesn't believe the report alone suggests anyone's at risk of winding up behind bars. Frenkel is a former prosecutor and ex-enforcement official at the Securities and Exchange Commission and now a defense attorney. He says the report's strongest language calls Lehman's executive's actions grossly negligent and materially misleading.

Mr. JACOB FRENKEL (Former SEC enforcement lawyer): And that leaves out a critical word, which is false.

NOGUCHI: Frenkel says the difference is crucial. The standard for criminal prosecution is that the action must be both false and misleading. Still, he believes the report leaves Lehman, its executives and Ernst & Young vulnerable to more civil lawsuits.

Mr. FRENKEL: What the report is clearly saying, is there is a basis for any one in the civil domain, whether the SEC or the shareholders, to bring claims.

NOGUCHI: In many ways this report has already done all the exhaustive research necessary to bring such suits. It reportedly cost more than $30 million to produce and its table of contents alone is 38 pages. Lehman is now being unwound and its parts are being sold off to pay off creditors. That work is expected to take three to five years to complete.

Yuki Noguchi, NPR News, Washington. Transcript provided by NPR, Copyright NPR.

Most Popular